Background
1. Major Corporate Houses in India, besides making efforts to design a foolproof business process, spend lot of efforts and money in designing various control teams within a business (major Infrastructure businesses, tyre manufacturers, retailers, auto industry players etc). Invariably, such teams shall consist of Internal Audit Team (IA) and Loss prevention team which is termed differently in different business. It may be called Security and Loss Prevention Team (SLP) or Asset Protection Team or Security and Administration Team or Security Team etc. (to remain in sympathy we shall be terming this team as Loss Prevention Team or LP team). Underlying difference between the two lies in the fact that the talent pool from which they are picked up and thought process in their tasking are different. IA teams draw their manpower pool from Charted Accountants while LP team has members drawn from Security background - be it civilians those who have turned security experts or from Para Military Forces or Local Police or from defence forces.
2. In order to not to mix up the issues, employment of Information Technology Security Team within the business has not been discussed further, despite their having a strong relevance in the current issue of preventing losses.
Current Scenario
3. Indian businesses feel that since these two teams have been drawn from different specializations, their command, control and employment structures also need to be different, despite the fact that both of the teams are trying to protect the interest of the business, however, both employ different tools for the same. Consequently, IA team reporting structure is built around reporting to company CFO while reporting of LP team has a separate reporting channel and report to LP head who in turn reports to the Chairman bypassing the CFO.
The Conflict
4. While both teams are supporting business to remain healthy, the reporting structure entails a serious conflict in employment of these teams by default. In simpler terms it sets of ‘Battle of Turf’. Both teams, though claim, that they are working together for the betterment of the business but still they NEVER SHARE the inputs available with them or share the inputs at a stage when the input holder can proceed no further in investigations. The experience shows that on some occasions major loss could not be detected due to the fact that the LP team did not know technicalities of commercial audit and in some cases, Audit team had the input but did not know what to do beyond identifying the process failures or compliances. In both cases – a huge waste of efforts and resources. Overall, a classical case of LEFT HAND NOT KNOWING WHAT RIGHT HAND IS DOING.
LIMITING FACTORS
5. Internal Audit Team. They are proven experts in their field of commercial and compliance audit. It is also not disputed that they are known to be doing excellent work in protecting the interest of the businesses. Their known Return On Investment to the business is also impressive. Despite their above laurels, they are POOR reader of “INTENT” behind the lapses which they discover as part of their job.
6. This translates into the fact that though the corrective measures, in terms of strengthening of processes is immediately taken, there is no action on “MIND” behind those lapses. The catch comes now, the brain behind such lapses knows that if he has to be successful again, he has to devise some other method to defeat internal controls. In a way, this 'brain' is wiser now, as no action was taken against him and he remains invisible to internal auditors. He will harm the business next time in more intelligent ways.
7. LP Team. This team has expertise in the fields of physical protection of company’s assets, identifying external and internal threats to business, prophylactic security, questioning of suspects, gathering information of malicious activities within the business etc. These teams have also proven record and their achievements can also be talked about in any given business. Though they are expert reader of mind behind a particular loss causing activity, but, they are POOR JUDGE of commercial figures. Most of the time, they do not even know how to read profit and loss statement in a critical manner, because their core competency is different.
BEST OF BOTH WORLDS
8. If a business has to derive the maximum benefits out of employment of these two teams and yet remain cost effective, it has to devise a structure wherein both teams work in perfect synergy without any ego clashes or protecting turfs. The organogram should encourage site level joint audits or as and when one team takes up an audit the other team shall provide required expertise for end to end closure of case.
ADVANTAGES
9. Though, advantages accruing out of such synergized efforts are self explanatory, it is still felt that they be summed up, which is as follows :-
(a) Better cost to benefit ratio to business.
(b) Sharper teeth to auditors and to investigators.
(c) Higher efficiency of controls leading to reduced financial leakages.
(d) Reduced time in detection of loss causing activities.
(e) Dominance of business controls over malicious intent.
Friday, March 27, 2009
Tuesday, March 24, 2009
BUSINESS BEING RUN ON FAITH = BUSINESS ON FAIT ACCOMPLI
Lot of times during past 22 years I have heard the statements from reputed CEOs that we need to have faith in our employees. Well, it is most desirable to have total faith in our employees talent but, it is altogether a different proposition to build a business model around this thought process. My experience indicates that a business model centring on faith, hoping that all employees shall continue to work truthfully, is a perfect recipe for business disaster. By not having adequate controls in business models, we offer opportunities to most honest talent to turn dishonest. Some of the examples are listed below :-
(a) A store Supervisor shared his password with his subordinate cashier in GOOD FAITH to tide over a minor customer issue at that time. Supervisor never changed his password, as he believed that it is with his team member. Later, it was detected that this cashier (to whom supervisor had provided his password) had misused supervisor’s password ("when one person uses other employees' data to avoid detection") and carried out fraudulent refunds causing a huge loss to the store.
(b) Critical sales data of a retailer was fraudulently shared with competition by one employee for monetary consideration. Independent studies show "50 per cent said they had been the victim of data theft in the last 12 months"
(c) Disputed property was hired on behalf of a company by its employees for personal monetary benefits. The issue of such properties went to court, thereby, preventing company from using the premises which it got hired through its own employees.
(d) System data was found fudged by some remote login for the simple reason that the remote login was made possible due to password sharing done on GOOD FAITH. Even former employee can cause such data loss/ manipulation.
(e) It is known world over that employees in retail sector are responsible for causing approximately $ 98.6 billion every year to retailers.
(f) Vendor caused a loss of million of rupees to the company by employing dishonest means.
(g) In one of the investigations it got revealed that some employees joined hands with dishonest transporter and changed superior quality goods with inferior quality goods enroute from one business entity to another.
THE LIST GOES ON (all of above are issues which have been witnessed / investigated personally)
The experience also conclusively proves that had there been adequate controls in the businesses, all the above could have been prevented or atleast, they could have been detected much before they assumed such gigantic proportions.
The issues listed above conclusively prove that a business can only be run in business like manner, based on system of checks incorporated in various business processes. Any business being run on faith is business designed to be doomed.
Indian Army has a very popular saying, "A task which is not checked is a task not done at all." Well, there is a lot of wisdom in the saying.
Saturday, March 21, 2009
Pattern Recognition
One of the most common practice of store employees to defraud retailer is to bring down (Mark Down) the price of merchandise at a level which is much lower than the regular sales price of the product. Mark downs also take place regularly due to various promotional schemes which retailers offer to its customers. Products nearing 'best before date' also needs to be marked down so as to clear the stock before expiry date. In the interest of business, such privileges are also delegated to individual stores. Dishonest employees use this privilege to either derive personal monetary advantage or use it to pass unauthorised benefits to their friends and families. Since the billing is done on POS, the sales would get recorded in data ware house.
To protect the interest of business, it is most desirable that analysis of this 'marked down' data be carried out regularly at back end. That would indicate if marked downs are being done for operational reasons or for personal reasons. Once such analysis is completed then only investigator should visit store for final findings. This flows from the fact that it is highly undesirable that loss prevention / security officer visits stores to detect malpractices. His presence at store is more of interruption to business rather than to expedite the business.
It is obvious from the above, that we need to have as much detailed and focused analysis of data, as far as possible, at the back end so that minimum time of investigator is spent at store.
To help investigators interpret the data, a sample and simple method of recognizing a pattern indicative of fraud, has been discussed in slides below.
To protect the interest of business, it is most desirable that analysis of this 'marked down' data be carried out regularly at back end. That would indicate if marked downs are being done for operational reasons or for personal reasons. Once such analysis is completed then only investigator should visit store for final findings. This flows from the fact that it is highly undesirable that loss prevention / security officer visits stores to detect malpractices. His presence at store is more of interruption to business rather than to expedite the business.
It is obvious from the above, that we need to have as much detailed and focused analysis of data, as far as possible, at the back end so that minimum time of investigator is spent at store.
To help investigators interpret the data, a sample and simple method of recognizing a pattern indicative of fraud, has been discussed in slides below.
Slide 1 This fist picture explains the methodology to narrow down data from millions of entries to few hundreds and then analyze those few entries further.
Slide 2 After having narrowed down the data to few hundred entries from million entries earlier, now the focus is to narrow down further to specific stores.
Slide 3 If the analyst has reached the point as given in this picture, be sure that he / she would be able to home on to the most suspicious entries and the chances are that even sitting at back end, he would be able to clearly discern as to what actions at POS (whether malicious or otherwise) would have led this entry to crop up in data warehouse. 90% chances are that the analyst shall be able to home on that single suspicious data out of whole data – in other words, he / she would be able to find a needle in the hay stack.
There could be many more patterns available to be flagged depending upon extent of automation in the company, type of reports being pulled out of data warehouse and also on experience of the investigators / loss prevention officers to interpret the same. Since it is not possible to discuss all reports and patterns in the given time and space available – a sample analysis is attached.
Slide 3 If the analyst has reached the point as given in this picture, be sure that he / she would be able to home on to the most suspicious entries and the chances are that even sitting at back end, he would be able to clearly discern as to what actions at POS (whether malicious or otherwise) would have led this entry to crop up in data warehouse. 90% chances are that the analyst shall be able to home on that single suspicious data out of whole data – in other words, he / she would be able to find a needle in the hay stack.
There could be many more patterns available to be flagged depending upon extent of automation in the company, type of reports being pulled out of data warehouse and also on experience of the investigators / loss prevention officers to interpret the same. Since it is not possible to discuss all reports and patterns in the given time and space available – a sample analysis is attached.
Sunday, March 15, 2009
UNOBTRUSIVE SURVEILLANCE AT STORES
All organised retailers do up the stores so that it attracts customers. False ceilings, glazed tiles, ACs, glass doors, shelves etc - all is done. To prevent shoplifting, the best is to follow each customer - well sounds impossible ???????????????????
Try putting glazed tiles or high reflective material (for example glass) as false ceilings. Store employee standing in one corner of store can view complete store floor by looking at the reflections in this false ceiling, even the actions of dishonest customer who is trying to hide something on person behind some dark spot in store become visible............Live coverage of compelete store --------
Moment customer knows that he / she is continuously under surveillance, that itself deters shoplifting
Try putting glazed tiles or high reflective material (for example glass) as false ceilings. Store employee standing in one corner of store can view complete store floor by looking at the reflections in this false ceiling, even the actions of dishonest customer who is trying to hide something on person behind some dark spot in store become visible............Live coverage of compelete store --------
Moment customer knows that he / she is continuously under surveillance, that itself deters shoplifting
Friday, March 13, 2009
TRANSIT LOSS PREVENTION
Whenever merchandise is being moved in closed container type trucks, it must be ensured that door hinges of truck cargo section are properly affixed / fastened. It can happen that a mischievous transporter keep the door hinges loose deliberately, thereby helping him to open the door during transhipment without disturbing the 'door seal' which the despatching business might affix to ensure safe transportation of his merchandise.
Even if hinges are properly affixed, it must be ensured that centre bolt holding door hinges is also permanently welded. A loose centre bolt can also be easily removed enroute and merchadise can be taken out without disturbing the 'seal' placed to seal the door.
A dishonest transporter can easily steal / replace merchandise enroute, if the above two issues are not addressed by the business.
Even if hinges are properly affixed, it must be ensured that centre bolt holding door hinges is also permanently welded. A loose centre bolt can also be easily removed enroute and merchadise can be taken out without disturbing the 'seal' placed to seal the door.
A dishonest transporter can easily steal / replace merchandise enroute, if the above two issues are not addressed by the business.
Friday, March 6, 2009
CASH REFUND FRAUD
CASH REFUND FRAUD
BACKGROUND
1. One of the most common method of cashier’s fraud in Retail Industry is ‘Refund Transaction’. This methodology causes double loss to the company. First, it causes ‘Shrink’ as the item billed in return sales, does not physically get back to store and secondly, it causes cash loss, as the cost of item billed in reverse sale gets pocketed by the dishonest cashier.
2. Various cashiers have been using different methodology to carry out this fraud. However, each such cashier shall have distinct signatures of his actions – something like – generally, all criminals have an identifiable modus operandi.
METHODOLOGY OF COMMITTING CASH REFUND FRAUDS
3. Article Selection. Generally a dishonest cashier will generally select a few items for which he or she would carry out refunds for his / her personal gains. Such articles are generally the ones whose prices are in rounded off figure like Rs 80/-, Rs 299/- etc. This is required for the simple reason to keep the account simple. If a cashier selects low value item, he / she might have to carryout refunds very frequently, thereby, exposing him / her to risk of being detected. If the article is of high value, the same might attract store management attention to that because chances of detecting missing high value SKUs are more as compared to mid level priced SKU (above example is applicable more to general retailer rather than a brand retailer who might have SKUs of high value.
4. Over a period of time, cashiers get used to carrying out fraudulent refunds of particular group of SKUs. Each such cashier develops a liking for particular SKU because it becomes easier for him / her to remember the bar code and price. If he has spared some shelf edge labels, then he would continue to use the same.
5. Timing The timing to effect such transaction is very crucial. It shall be generally done in one of the following time line :-
(a) At a time when footfall is low at store. In other words, when cahiers have time to themselves.
(b) At a time nearing the opening of shift or towards the end of shift. This is for the reason that they are about to tally the cash and cash drawers would be open by default.
(c) If frequency of such transaction by a particular cashier is few and far between, then, he or she would execute this a day before his / her scheduled off day.
6. Cashier ID . Generally a dishonest cashier would use (steal) someone else’s ID to perpetuate this kind of fraud. This ID could be of some other cashier or that of Supervisor. Executing such transactions in someone’s else’s ID insulates the dishonest cashier (or so he / she thinks) against penalty in the event of transaction getting caught, as the dishonest cashier retains high degree of deniability.
Preventive / Detection Tools
7. The following are tested tools for preventing and detecting this kind of fraud :-
(a) Robust refund policy and ensure strict compliance to same.
(b) Carry out ‘pattern recognition’ of data available in data store house, infact, standarised reports can also be generated for users across the board.
(c) Carry out video analytics.
(d) Develop informers from amongst the honest employees. They should know whom to escalate such incidents.
(e) Appropriate password protection policy.
BACKGROUND
1. One of the most common method of cashier’s fraud in Retail Industry is ‘Refund Transaction’. This methodology causes double loss to the company. First, it causes ‘Shrink’ as the item billed in return sales, does not physically get back to store and secondly, it causes cash loss, as the cost of item billed in reverse sale gets pocketed by the dishonest cashier.
2. Various cashiers have been using different methodology to carry out this fraud. However, each such cashier shall have distinct signatures of his actions – something like – generally, all criminals have an identifiable modus operandi.
METHODOLOGY OF COMMITTING CASH REFUND FRAUDS
3. Article Selection. Generally a dishonest cashier will generally select a few items for which he or she would carry out refunds for his / her personal gains. Such articles are generally the ones whose prices are in rounded off figure like Rs 80/-, Rs 299/- etc. This is required for the simple reason to keep the account simple. If a cashier selects low value item, he / she might have to carryout refunds very frequently, thereby, exposing him / her to risk of being detected. If the article is of high value, the same might attract store management attention to that because chances of detecting missing high value SKUs are more as compared to mid level priced SKU (above example is applicable more to general retailer rather than a brand retailer who might have SKUs of high value.
4. Over a period of time, cashiers get used to carrying out fraudulent refunds of particular group of SKUs. Each such cashier develops a liking for particular SKU because it becomes easier for him / her to remember the bar code and price. If he has spared some shelf edge labels, then he would continue to use the same.
5. Timing The timing to effect such transaction is very crucial. It shall be generally done in one of the following time line :-
(a) At a time when footfall is low at store. In other words, when cahiers have time to themselves.
(b) At a time nearing the opening of shift or towards the end of shift. This is for the reason that they are about to tally the cash and cash drawers would be open by default.
(c) If frequency of such transaction by a particular cashier is few and far between, then, he or she would execute this a day before his / her scheduled off day.
6. Cashier ID . Generally a dishonest cashier would use (steal) someone else’s ID to perpetuate this kind of fraud. This ID could be of some other cashier or that of Supervisor. Executing such transactions in someone’s else’s ID insulates the dishonest cashier (or so he / she thinks) against penalty in the event of transaction getting caught, as the dishonest cashier retains high degree of deniability.
Preventive / Detection Tools
7. The following are tested tools for preventing and detecting this kind of fraud :-
(a) Robust refund policy and ensure strict compliance to same.
(b) Carry out ‘pattern recognition’ of data available in data store house, infact, standarised reports can also be generated for users across the board.
(c) Carry out video analytics.
(d) Develop informers from amongst the honest employees. They should know whom to escalate such incidents.
(e) Appropriate password protection policy.
Tuesday, March 3, 2009
IMPORTANCE OF EMPLOYEE BACKGROUND CHECKS – PRE ENROLLMENT ACTIVITY
IMPORTANCE OF EMPLOYEE BACKGROUND CHECKS – PRE ENROLMENT ACTIVITY
BUSINESS TRENDS
1. Whenever, a franchisee or an employee is employed or hired, most of the business have very elaborate mechanisms to carry out the following as part of background checks :-
(a) Address verification.
(b) Educational background verification.
(c) Past employment verification.
(d) last salary drawn verification.
(e) Character verification.
2. However, it has been noticed that despite elaborate listing of related processes, a minor slip up somewhere, by design or default, can have catastrophic effect on the business as would be seen in understated issues.
IGNORANCE OF BASIC COMMON SENSE CHECKS
3. Address Verification – Generally it is based on the documents submitted by the perspective candidate in terms either a driving license, pass port, electricity bill, voter card, PAN card etc. However, what is generally ignored that the addresses contained in these documents were correct (believed to be correct) at the point of time at which these documents were issued. WHAT IN CASE THE PERSPECTIVE CANDIDATE HAS CHANGED HIS RESIDENCE SUBSEQUENT TO ISSUE OF THESE DOCUMENTS ? We in business, land up verifying unreliable document ??
4. Remedy lies in the following :-
(a) Photocopies should be accepted only when accompanied by originals and be certified on copy with endorsement “ORIGINAL SEEN AND VERIFIED BY Mr / Ms ………….ON ……..(Date)” and be duly signed by the person verifying the same.
(b) Verify the photograph of the perspective candidate who is being interviewed with the ones which have been affixed on his address documents.
(c) Obtain an undertaking from the perspective employee that he is currently staying at the address about which he is producing a document. In case of change, ask for police verification or some other certification suiting the legal requirement.
(b) In case of employee being hired for critical positions, it would be better if physical checks could be carried out to verify the address.
5. Educational Background - Can a situation be imagined where in a person being hired is not the one who finally joins the company or not the one having the requisite qualifications? THERE HAVE BEEN CASES OF THIS NATURE TOO. Under the current procedures, all important educational certificates from reputed institutions carry a photograph of the student, but, every institute is not doing the same.
6. Remedy lies in cross checking the details with institute whose certificate is being produced as testimony to educational qualifications. Alternatively, other technical details can be cross checked from other related documents like parentage, date of birth, mother’s name etc. Few questions during the interview can lead to detection fraudulent cases.
7. In case of employee having a permanent address at far away place, the verification can be done by sending an ‘Acknowledgement Due’ Registered letter on the indicated address through postal department or through a courier company with instructions to produce proof of delivery to concerned HR team. If that is not possible, then tele verification based on land line number can also be made.
8. In one of the investigated case, it emerged that younger sister was working while the elder one was interviewed and her (elder sister’s) educational records were held with enrolment team. In another case, it was found that the output of employee did not match the job profile and it emerged that he had produced forged educational records.
9. Banking Details (A Case Study). A case was detected wherein an employee (Say Mr Suresh, of current employer but name changed) had produced his salary account, proof of address and company identity to some other bank stating that he is working with that company. Later this employee obtained huge loan and did not repay installments. What happened was that during the process of obtaining loan, he obtained required certificates from his employer. After obtaining this loan, the employee resigned from his current service. On noticing default, the banker which granted him loan approached his known address and were horrified to find that he never stayed there. Later the bank approached the previous employer and it got confirmed that the employer had verified his address on the basis of details mentioned in the PHOTOCOPIES of the following documents :-
(a) Telephone bill.
(b) Driving License.
(c) Ration Card.
10. Since all of the above documents produced by employee at the time of enrollment were PHOTOCOPIES and no one in the process of enrolment thought it fit to examine the original - ALL TURNED OUT TO BE FORGED DOCUMENTS.
11. Experience Verification. It has been noticed with some degree of satisfaction that lot of companies maintain brief record of employee personal and performance data permanently in the system. Such data can help businesses by referring to this data in case such query comes up from future employer of the employee. This system, if adopted across the board by all business, will make all businesses a healthy place to work in, without business heads worrying of enrolment of fraudsters.
1. Whenever, a franchisee or an employee is employed or hired, most of the business have very elaborate mechanisms to carry out the following as part of background checks :-
(a) Address verification.
(b) Educational background verification.
(c) Past employment verification.
(d) last salary drawn verification.
(e) Character verification.
2. However, it has been noticed that despite elaborate listing of related processes, a minor slip up somewhere, by design or default, can have catastrophic effect on the business as would be seen in understated issues.
IGNORANCE OF BASIC COMMON SENSE CHECKS
3. Address Verification – Generally it is based on the documents submitted by the perspective candidate in terms either a driving license, pass port, electricity bill, voter card, PAN card etc. However, what is generally ignored that the addresses contained in these documents were correct (believed to be correct) at the point of time at which these documents were issued. WHAT IN CASE THE PERSPECTIVE CANDIDATE HAS CHANGED HIS RESIDENCE SUBSEQUENT TO ISSUE OF THESE DOCUMENTS ? We in business, land up verifying unreliable document ??
4. Remedy lies in the following :-
(a) Photocopies should be accepted only when accompanied by originals and be certified on copy with endorsement “ORIGINAL SEEN AND VERIFIED BY Mr / Ms ………….ON ……..(Date)” and be duly signed by the person verifying the same.
(b) Verify the photograph of the perspective candidate who is being interviewed with the ones which have been affixed on his address documents.
(c) Obtain an undertaking from the perspective employee that he is currently staying at the address about which he is producing a document. In case of change, ask for police verification or some other certification suiting the legal requirement.
(b) In case of employee being hired for critical positions, it would be better if physical checks could be carried out to verify the address.
5. Educational Background - Can a situation be imagined where in a person being hired is not the one who finally joins the company or not the one having the requisite qualifications? THERE HAVE BEEN CASES OF THIS NATURE TOO. Under the current procedures, all important educational certificates from reputed institutions carry a photograph of the student, but, every institute is not doing the same.
6. Remedy lies in cross checking the details with institute whose certificate is being produced as testimony to educational qualifications. Alternatively, other technical details can be cross checked from other related documents like parentage, date of birth, mother’s name etc. Few questions during the interview can lead to detection fraudulent cases.
7. In case of employee having a permanent address at far away place, the verification can be done by sending an ‘Acknowledgement Due’ Registered letter on the indicated address through postal department or through a courier company with instructions to produce proof of delivery to concerned HR team. If that is not possible, then tele verification based on land line number can also be made.
8. In one of the investigated case, it emerged that younger sister was working while the elder one was interviewed and her (elder sister’s) educational records were held with enrolment team. In another case, it was found that the output of employee did not match the job profile and it emerged that he had produced forged educational records.
9. Banking Details (A Case Study). A case was detected wherein an employee (Say Mr Suresh, of current employer but name changed) had produced his salary account, proof of address and company identity to some other bank stating that he is working with that company. Later this employee obtained huge loan and did not repay installments. What happened was that during the process of obtaining loan, he obtained required certificates from his employer. After obtaining this loan, the employee resigned from his current service. On noticing default, the banker which granted him loan approached his known address and were horrified to find that he never stayed there. Later the bank approached the previous employer and it got confirmed that the employer had verified his address on the basis of details mentioned in the PHOTOCOPIES of the following documents :-
(a) Telephone bill.
(b) Driving License.
(c) Ration Card.
10. Since all of the above documents produced by employee at the time of enrollment were PHOTOCOPIES and no one in the process of enrolment thought it fit to examine the original - ALL TURNED OUT TO BE FORGED DOCUMENTS.
11. Experience Verification. It has been noticed with some degree of satisfaction that lot of companies maintain brief record of employee personal and performance data permanently in the system. Such data can help businesses by referring to this data in case such query comes up from future employer of the employee. This system, if adopted across the board by all business, will make all businesses a healthy place to work in, without business heads worrying of enrolment of fraudsters.
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